Trusts worthy

Late last year the use of trusts came under fire from certain parts of Europe during the negotiations regarding the EU Savings Tax Directive (STD).

Austrian Finance Minister Josef Pröll was widely reported as saying that Austria and Luxembourg would veto proposed changes to the STD unless action was taken against trusts. He alleged that trusts allow investors, particularly in the Channel Islands, to remain anonymous. “If we are to give all our information to all the other countries automatically then we have to clarify what’s going on in trusts,” he said.

Many people are unaware of how trusts are used, including their substantial role in family succession planning, the ownership of property and pension provision. In ­addition, trusts are used widely in ­philanthropic and charitable giving and in the UK alone £3.3bn a year flows from trusts to charities.

The reality is that trusts are open to ­official scrutiny and are thus neither ’secret’ nor ’anonymous’. Trusts are subject to strict anti-money laundering regulations and information is available to governments on the source, owners and beneficiaries of trust funds. This information is shared, when appropriate, with other countries under terms of tax information exchange ­agreements (TIEAs).

Pröll’s comments may have arisen from a misreading of ’privacy’, where ­family ­financial details such as bank accounts and trusts are generally not regarded as public. This is not the same as ’bank secrecy’ where information-sharing is strictly limited by statute. On the contrary, trust information is both collected and exchanged internationally to prevent misuse.

Trusts are personal arrangements, often laying out how a family’s savings are to be used. In particular, they are a secure way of holding and managing assets for people who are not ready and able to manage them themselves – for example, to provide for a husband or wife after the death of their spouse while protecting the interests of ­children. Trusts are also frequently used to help succession planning in family ­businesses, and so preserve a business and the jobs of those employed by it – remember that family businesses ­constitute around 50 per cent of the UK economy and jobs.

Above board

Trusts may be ’private’, but they are ­certainly not secret. In the UK, for example, trustees must give the UK tax authorities full details when a trust is established and are ­generally personally liable for taxes due on the trust. The UK tax authorities have wide powers to obtain information from trustees ­concerning assets held, income received and distributions made. This is very similar to the situation in the US, where the policy position is that there should be no income tax advantage to trusts. As in the UK, there are strict reporting requirements to the tax authorities.

With respect to the Channel Islands, ­Jersey and Guernsey are both widely ­recognised as well-regulated financial ­centres and have participated positively in international efforts to fight money ­laundering and improve tax transparency. Both islands have received positive ­assessments under the International ­Monetary Fund’s (IMF) ’financial sector assessment’ programme. Jersey has also recently received a very positive IMF ­assessment of its compliance with Financial Action Task Force recommendations. Guernsey will be ­subject to assessment in 2010. Both Jersey and Guernsey were judged by the Organisation for Economic Cooperation and Development’s ­global forum to have substantially implemented the internationally agreed tax standard (ie achieved the ’white list’) from the inception of the process in early 2009.

Jersey and Guernsey have seen vast investment flows coming through them to the UK from the across the globe. They have been an essential conduit for continued investment during the financial crisis; ­without them, prospects for the UK ­economy would have gone from dark to ­catastrophic.

Jersey and Guernsey also have ­comprehensive regulatory regimes for trust service providers and are committed to ­combating financial crime of all sorts – including tax evasion, which is a criminal offence in the Channel Islands, unlike in some of the so-called ’secrecy jurisdictions’. Professional advisers are required to verify the identity of the principals in a trust ­relationship: the settlors, identifiable ­beneficiaries and protectors. This ­information must be given to the authorities on request if there are reasonable grounds for the request.

Fears that trusts in the Channel Islands can be used to allow investors to hide behind a veil of anonymity are thus misplaced. The Channel Islands have a strong track record as responsible members of the ­international community and have consistently ­participated positively in initiatives to target tax evasion and other forms of criminal activity.

During January’s meeting of EU Finance Ministers (Ecofin), agreement was reached to mandate the ’spontaneous’ exchange of banking information between member states. However, the communiqué issued after the meeting indicated that member states have not yet agreed on the extension of the EU Savings Directive to cover trusts and other ­financial vehicles.

The Society of Trust and Estate ­Practitioners will continue to lobby to ensure that legislative decisions are not made based on a misunderstanding of the nature and use of trusts.

In common law jurisdictions, such as the UK, the US and the Channel Islands, trusts are an important element in the lawful ­ownership and transmission of wealth. It would be most regrettable if misinformed comments about the use of trusts result in actions that might threaten a mechanism that allows families to make clear, long-term plans for their financial affairs, ­supports vulnerable individuals and ­provides vital support to many major ­charities around the world.


David Harvey is chief executive of the ­Society of Trust and Estate Practitioners Worldwide